Fearlessly Swimming Upstream to Risky Waters: The Role of Geographic Entry in Innovation

• Author: Raja Roy,Timothy David Hubbard,Minyoung Kim,Curba Morris Lampert,George Leckie
• DOI: http://doi.org/10.1111/joms.12347
• Published date: 01 November 2019
• Date: 01 November 2019

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

Fearlessly Swimming Upstream to Risky Waters: The Role

of Geographic Entry in Innovation

Curba Morris Lampert, Minyoung Kim,

Timothy David Hubbard, Raja Roy and George Leckie

Florida International University; University of Kansas; University of Notre Dame; New Jersey

Institute of Technology; University of Bristol

ABST RACT We examine the puzzli ng geographic pattern t hat shows firms enteri ng

countries with weak i ntellectual property r ights (IPR) protection with their research

and development (R&D) activities. Geogr aphic entry into weak IPR protection coun-

tries is at odds w ith conventional wisdom as such an env ironment erodes a firm's ability

to appropriate from its innovat ions. We offer that while the well- established pract ice of

spreading out a firm's value chai n activities ac ross a region has import ant implications

for value creation, what remains un addressed is the v alue appropriation aspect of such

activities. We introduce a multi level theory and mainta in that operating regionally

through commercializat ion activities (downstream activities) provides complementary

assets to the upst ream activities – specifica lly R&D activities in a country w ithin that region

– with which focal f irms can appropriate more from their innovations. We f ind that

regional downstrea m commercialization activities ca n substitute for weak IPR regimes ,

thereby providing fir ms with an alternative mechanism for protecti ng their intellectual

property in weak IPR countr ies.

Key words : complementarities, geographic entr y, innovation, R&D, upstream and

downstream act ivities, value appropri ation

INTRODUCTION

Innovation is a diff icult process, demanding that firms keep pace with technolog-

ical changes while avoiding overly repeating and exhausting recombinant oppor-

tunities (Fleming, 2001). Geographic entry into foreign markets through research

and development (R&D) activities can allow firms to access global resources to

Journal of Man agement Studi es 56:7 November 2019

doi:10.1111/j oms .12 347

Address for reprints: Curba Morris Lampert , College of Busines s, Florida I nternational Univers ity,

11200 Southwest 8th Street, M iami, FL 33199, USA (curba.lampert@f iu.edu)

1378 C. M. Lampert et al.

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

assist in their innovation processes (Almeida, 1996; Almeida and Kogut, 1999;

Doz and Wilson, 2012; Florida, 1997; Frost, 2001; Jaffe et al., 1993; Nelson, 1993;

Patel and Vega, 1999; Pearce, 1999; Zhao, 2006). An analysis by Goldman Sachs

offers economic evidence that the global distribution of research and scientific

activity is shi fting, suggesting a ‘changing and more global innovation landscape’

(Gilman, 2010, p. 3). As new hubs of innovative activity are emerging, and across

a range of industries – including automotive, electronics, IT consulting and ser-

vices, net working a nd communication dev ices, pharmaceutic als, a nd semicon-

ductors – it presents an opportunity for firms to rethi nk where they want to invest

their innovative activities (Gilman, 2010).

Recent instances of geographic entry into foreign countries through R&D activ-

ities by firms reflect the economic evidence. For example, Pfizer is investing $14

million in Chile to launch a Center of Excellence in Precision Medicine (CEPM),

which will focus on developing new genome-based diagnostic technologies for can-

cer (Leask, 2015). Sylvia Varela, president of Pfizer Oncology for Latin America,

explains ‘the work that will be done at CEPM will be on par with the best and most

renowned research centres in the world’ (Leask, 2015). Apple is investing $1 bil-

lion in a new R&D centre in Vietnam, joining the high-profile firms of Samsung

Electronics, Hewlett-Packard, and Panasonic, which have made significant invest-

ments in R&D centres there as well (Maylay Mail Online, 2016; Tuyet, 2016). Intel

chose Costa Rica to host its newest R&D ‘mega lab’, which will develop new smart-

phones, tablets, laptops, desktops, and all-in-one computers for its global custom-

ers (Arias, 2015a, 2015b; Costa Rican Investment Promotion Agency, 2014).

A primary reason for studying the role of geographic entry in innovation has

been to understand how firms can use geographic entry as a source of value cre-

ation. Geographic entry into foreign markets can allow firms the opportunity

to potentially access resources to fuel their innovative processes, including new

and diverse sources of knowledge (Almeida, 1996; Frost, 2001; Pearce, 1999),

high-quality scientists, engineers, and designers (Florida, 1997; Zhao, 2006), dif-

ferent national innovation systems (Freeman, 1987; Lundvall, 1992; Nelson, 1993;

Patel and Vega, 1999) and knowledge spillovers (Almeida and Kogut, 1999; Jaffe

et al., 1993), many of which are only reachable by being in distinct, host locations

(Birkinshaw, 2000; Cantwell, 1989; Dunning, 1998; Frost, 2001; Kogut, 1991).

Returning to our aforementioned examples, a firm's geographic entry into the

foreign markets of Chile, Vietnam, or Costa Rica can offer location-specific advan-

tages leading to enhanced value creation for the firm.

However, the performance of a firm's R&D investment is a joint function of

value creation and value appropriation. In this light, what is striking about Chile,

Vietnam, and Costa Rica is that they are all countries that do not have strong in-

tellectual property rights (IPR) protection. As R&D activities are subject to risks

of knowledge leakage and threats of imitation from global exposure, firms may

not be able to appropriate the economic return from the value they create in

such countries (Teece, 1986). This makes the empirical patterns of geographic

entry into the weak IPR protection countries all the more perplexing. Thus, in

Fearlessly Swimming Upstream to Risky Waters 1379

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

understanding the role of geographic entry in innovation there remains the un-

resolved question of how do firms appropriate the value they create from their R&D

activities in such weak appropriability regime countries?

In this paper, we seek an answer to this research question and attempt to explain

the recent, puzzling geographic patterns that show firms entering their R&D ac-

tivities into countries with weak IPR protection. Geographic entry into weak IPR

countries is at odds with conventional wisdom as such an environment erodes

firms’ ability to appropriate from their innovations. We combine the technology

management literature's complementary assets framework (Mitchell, 1989, 1991;

Teece, 1986; Tripsas, 1997) with the international management literature's re-

gionalization theory and semi-globalization perspective (Ghemawat, 2003, 2005;

Rugman and Verbeke, 2004, 2007) to develop a new theoretical model of the

role of geographic entry in innovation. Joining the two streams of theories not

only helps us to address the research question but also results in explanatory

power gains from the cross-fertilization, which facilitates a new exchange in a

now shared conversation across the technology management and international

management literatures.

Toward this end, we first conceptualize geographic entry into a region as the re-

gional configuration of complementary assets, or the geographic dispersion of a firm's

value chain activities across countries within a region. With this conceptualization,

we offer that while the well-established practice of spreading out a firm's value

chain activities across a region has important implications for value creation, what

remains unaddressed is the value appropriation aspect of such activities. We intro-

duce a multilevel theory and maintain that operating regionally through commer-

cialization activities (downstream activities) provides complementary assets to the

upstream activities – specifically R&D activities in a country within that region – with

which the focal firm can appropriate more from its innovations. More specifically,

we develop a framework that suggests that commercialization activities in the re-

gion help firms develop a firm-specific value appropriation capability that allows

them to appropriate more from their innovation activities even in the countries

within the region with weak IPR protections. We submit that regional downstream

commercialization activities can substitute for weak IPR regimes, thereby provid-

ing the firm with an alternative mechanism for protecting its intellectual property

in weak IPR countries.

We test our theory using a dataset of innovative activity in the global pharmaceuti-

cal industry encompassing 142 multinational enterprises (MNEs) operating in 118

countries within 18 geographic regions. This dataset accounts for all of the sam-

ple firms’ drug commercialization activity and R&D activity worldwide. We employ

a cross-classified multilevel analysis to simultaneously account for the firm, coun-

try, and regional levels of analysis and answers calls for more multilevel research

(Arregle et al., 2006; Cheng et al., 2009; Hitt et al., 2007; Peterson et al., 2012).

Our theory and findings contribute to the literature in three ways. First, we illu-

minate the role of geographic entry in innovation as the regional configuration of